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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-11487
LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Indiana | 35-1559596 |
(State or Other Jurisdiction | (IRS Employer |
of Incorporation or Organization) | Identification No.) |
| | | |
202 East Center Street, | |
Warsaw | , | Indiana | 46580 |
(Address of principal executive offices) | (Zip Code) |
(574) 267‑6144
(Registrant’s Telephone Number, Including Area Code)
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common stock, No par value | | LKFN | | The NASDAQ Stock Market LLC |
| | | | (Nasdaq Global Select Market) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding at July 26, 2023: 25,433,215
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| (Unaudited) | | |
ASSETS | | | |
Cash and due from banks | $ | 75,081 | | | $ | 80,992 | |
Short-term investments | 98,056 | | | 49,290 | |
Total cash and cash equivalents | 173,137 | | | 130,282 | |
| | | |
Securities available-for-sale, at fair value | 1,062,069 | | | 1,185,528 | |
Securities held-to-maturity, at amortized cost (fair value of $114,264 and $111,029, respectively) | 129,070 | | | 128,242 | |
Real estate mortgage loans held-for-sale | 1,298 | | | 357 | |
Loans, net of allowance for credit losses of $72,058 and $72,606 | 4,790,202 | | | 4,637,790 | |
Land, premises and equipment, net | 58,839 | | | 58,097 | |
Bank owned life insurance | 107,738 | | | 108,407 | |
Federal Reserve and Federal Home Loan Bank stock | 21,420 | | | 15,795 | |
Accrued interest receivable | 27,398 | | | 27,994 | |
Goodwill | 4,970 | | | 4,970 | |
Other assets | 133,405 | | | 134,909 | |
Total assets | $ | 6,509,546 | | | $ | 6,432,371 | |
| | | |
| | | |
LIABILITIES | | | |
Noninterest bearing deposits | $ | 1,438,030 | | | $ | 1,736,761 | |
Interest bearing deposits | 3,985,029 | | | 3,723,859 | |
Total deposits | 5,423,059 | | | 5,460,620 | |
| | | |
Federal Funds purchased | 0 | | | 22,000 | |
Federal Home Loan Bank advances | 400,000 | | | 275,000 | |
Total borrowings | 400,000 | | | 297,000 | |
| | | |
Accrued interest payable | 9,833 | | | 3,186 | |
Other liabilities | 84,659 | | | 102,678 | |
Total liabilities | 5,917,551 | | | 5,863,484 | |
| | | |
STOCKHOLDERS’ EQUITY | | | |
Common stock: 90,000,000 shares authorized, no par value | | | |
25,896,764 shares issued and 25,429,216 outstanding as of June 30, 2023 | | | |
25,825,127 shares issued and 25,349,225 outstanding as of December 31, 2022 | 123,367 | | | 127,004 | |
Retained earnings | 661,447 | | | 646,100 | |
Accumulated other comprehensive income (loss) | (177,645) | | | (188,923) | |
Treasury stock at cost (467,548 shares as of June 30, 2023, 475,902 shares as of December 31, 2022) | (15,263) | | | (15,383) | |
Total stockholders’ equity | 591,906 | | | 568,798 | |
Noncontrolling interest | 89 | | | 89 | |
Total equity | 591,995 | | | 568,887 | |
Total liabilities and equity | $ | 6,509,546 | | | $ | 6,432,371 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (unaudited - dollars in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
NET INTEREST INCOME | | | | | | | |
Interest and fees on loans | | | | | | | |
Taxable | $ | 75,047 | | | $ | 44,138 | | | $ | 144,589 | | | $ | 83,873 | |
Tax exempt | 960 | | | 280 | | | 1,861 | | | 449 | |
Interest and dividends on securities | | | | | | | |
Taxable | 3,376 | | | 3,727 | | | 6,889 | | | 7,005 | |
Tax exempt | 4,064 | | | 4,994 | | | 8,364 | | | 9,600 | |
Other interest income | 1,035 | | | 483 | | | 1,999 | | | 729 | |
Total interest income | 84,482 | | | 53,622 | | | 163,702 | | | 101,656 | |
| | | | | | | |
Interest on deposits | 33,611 | | | 4,890 | | | 58,529 | | | 7,971 | |
Interest on borrowings | | | | | | | |
Short-term | 2,347 | | | 0 | | | 5,130 | | | 0 | |
Long-term | 0 | | | 54 | | | 0 | | | 127 | |
Total interest expense | 35,958 | | | 4,944 | | | 63,659 | | | 8,098 | |
| | | | | | | |
NET INTEREST INCOME | 48,524 | | | 48,678 | | | 100,043 | | | 93,558 | |
| | | | | | | |
Provision for credit losses | 800 | | | 0 | | | 5,150 | | | 417 | |
| | | | | | | |
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 47,724 | | | 48,678 | | | 94,893 | | | 93,141 | |
| | | | | | | |
NONINTEREST INCOME | | | | | | | |
Wealth advisory fees | 2,271 | | | 2,204 | | | 4,471 | | | 4,491 | |
Investment brokerage fees | 428 | | | 541 | | | 962 | | | 1,060 | |
Service charges on deposit accounts | 2,726 | | | 2,882 | | | 5,356 | | | 5,691 | |
Loan and service fees | 3,002 | | | 3,195 | | | 5,848 | | | 6,084 | |
Merchant card fee income | 929 | | | 904 | | | 1,806 | | | 1,719 | |
Bank owned life insurance income (loss) | 693 | | | (183) | | | 1,384 | | | (266) | |
Interest rate swap fee income | 794 | | | 354 | | | 794 | | | 404 | |
Mortgage banking income (loss) | (35) | | | 351 | | | (134) | | | 860 | |
Net securities gains | 3 | | | 0 | | | 19 | | | 0 | |
Other income | 690 | | | 244 | | | 1,309 | | | 1,136 | |
Total noninterest income | 11,501 | | | 10,492 | | | 21,815 | | | 21,179 | |
| | | | | | | |
NONINTEREST EXPENSE | | | | | | | |
Salaries and employee benefits | 11,374 | | | 14,798 | | | 27,437 | | | 29,190 | |
Net occupancy expense | 1,681 | | | 1,688 | | | 3,253 | | | 3,317 | |
Equipment costs | 1,426 | | | 1,459 | | | 2,864 | | | 2,870 | |
Data processing fees and supplies | 3,474 | | | 3,203 | | | 6,926 | | | 6,284 | |
Corporate and business development | 1,298 | | | 1,433 | | | 2,729 | | | 2,652 | |
FDIC insurance and other regulatory fees | 803 | | | 619 | | | 1,598 | | | 1,058 | |
Professional fees | 2,049 | | | 1,414 | | | 4,170 | | | 2,973 | |
Wire fraud loss | 18,058 | | | 0 | | | 18,058 | | | 0 | |
Other expense | 2,571 | | | 3,299 | | | 5,133 | | | 6,538 | |
Total noninterest expense | 42,734 | | | 27,913 | | | 72,168 | | | 54,882 | |
| | | | | | | |
INCOME BEFORE INCOME TAX EXPENSE | 16,491 | | | 31,257 | | | 44,540 | | | 59,438 | |
Income tax expense | 1,880 | | | 5,584 | | | 5,651 | | | 10,123 | |
NET INCOME | $ | 14,611 | | | $ | 25,673 | | | $ | 38,889 | | | $ | 49,315 | |
| | | | | | | |
BASIC WEIGHTED AVERAGE COMMON SHARES | 25,607,663 | | | 25,527,896 | | | 25,595,412 | | | 25,521,618 | |
| | | | | | | |
BASIC EARNINGS PER COMMON SHARE | $ | 0.57 | | | $ | 1.00 | | | $ | 1.52 | | | $ | 1.93 | |
| | | | | | | |
DILUTED WEIGHTED AVERAGE COMMON SHARES | 25,686,354 | | | 25,697,577 | | | 25,696,370 | | | 25,699,908 | |
| | | | | | | |
DILUTED EARNINGS PER COMMON SHARE | $ | 0.57 | | | $ | 1.00 | | | $ | 1.51 | | | $ | 1.92 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited - dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net income | $ | 14,611 | | | $ | 25,673 | | | $ | 38,889 | | | $ | 49,315 | |
Other comprehensive income (loss) | | | | | | | |
Change in available-for-sale and transferred securities: | | | | | | | |
Unrealized holding gain (loss) on securities available-for-sale arising during the period | (13,511) | | | (82,609) | | | 13,282 | | | (221,605) | |
Reclassification adjust for amortization of unrealized losses on securities transferred to held-to-maturity | 494 | | | 386 | | | 985 | | | 386 | |
Reclassification adjustment for gains included in net income | (3) | | | 0 | | | (19) | | | 0 | |
Net securities gain (loss) activity during the period | (13,020) | | | (82,223) | | | 14,248 | | | (221,219) | |
Tax effect | 2,734 | | | 17,349 | | | (2,992) | | | 46,538 | |
Net of tax amount | (10,286) | | | (64,874) | | | 11,256 | | | (174,681) | |
Defined benefit pension plans: | | | | | | | |
Amortization of net actuarial loss | 15 | | | 36 | | | 30 | | | 72 | |
Net gain activity during the period | 15 | | | 36 | | | 30 | | | 72 | |
Tax effect | (4) | | | (9) | | | (8) | | | (18) | |
Net of tax amount | 11 | | | 27 | | | 22 | | | 54 | |
Total other comprehensive income (loss), net of tax | (10,275) | | | (64,847) | | | 11,278 | | | (174,627) | |
Comprehensive income (loss) | $ | 4,336 | | | $ | (39,174) | | | $ | 50,167 | | | $ | (125,312) | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - dollars in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Stockholders’ Equity | | Noncontrolling Interest | | Total Equity |
| Shares | | Stock | | | | | | |
| | | | | | | | | | | | | | | |
Balance at April 1, 2022 | 25,346,149 | | | $ | 121,138 | | | $ | 596,578 | | | $ | (93,687) | | | $ | (15,016) | | | $ | 609,013 | | | $ | 89 | | | $ | 609,102 | |
Comprehensive loss: | | | | | | | | | | | | | | | |
Net income | | | | | 25,673 | | | | | | | 25,673 | | | | | 25,673 | |
Other comprehensive income (loss), net of tax | | | | | | | (64,847) | | | | | (64,847) | | | | | (64,847) | |
Cash dividends declared and paid, $0.40 per share | | | | | (10,225) | | | | | | | (10,225) | | | | | (10,225) | |
Treasury shares purchased under deferred directors' plan | (987) | | | 73 | | | | | | | (73) | | | 0 | | | | | 0 | |
Treasury shares sold and distributed under deferred directors' plan | | | | | | | | | | | 0 | | | | | 0 | |
Stock activity under equity compensation plans | | | | | | | | | | | 0 | | | | | 0 | |
Stock based compensation expense | | | 2,360 | | | | | | | | | 2,360 | | | | | 2,360 | |
Balance at June 30, 2022 | 25,345,162 | | | $ | 123,571 | | | $ | 612,026 | | | $ | (158,534) | | | $ | (15,089) | | | $ | 561,974 | | | $ | 89 | | | $ | 562,063 | |
| | | | | | | | | | | | | | | |
Balance at April 1, 2023 | 25,430,917 | | | $ | 125,840 | | | $ | 658,629 | | | $ | (167,370) | | | $ | (15,182) | | | $ | 601,917 | | | $ | 89 | | | $ | 602,006 | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | | | | | 14,611 | | | | | | | 14,611 | | | | | 14,611 | |
Other comprehensive income (loss), net of tax | | | | | | | (10,275) | | | | | (10,275) | | | | | (10,275) | |
Cash dividends declared and paid, $0.46 per share | | | | | (11,793) | | | | | | | (11,793) | | | | | (11,793) | |
Treasury shares purchased under deferred directors' plan | (1,701) | | | 81 | | | | | | | (81) | | | 0 | | | | | 0 | |
Treasury shares sold and distributed under deferred directors' plan | | | | | | | | | | | 0 | | | | | 0 | |
Stock activity under equity compensation plans | | | | | | | | | | | 0 | | | | | 0 | |
Stock based compensation expense | | | (2,554) | | | | | | | | | (2,554) | | | | | (2,554) | |
Balance at June 30, 2023 | 25,429,216 | | | $ | 123,367 | | | $ | 661,447 | | | $ | (177,645) | | | $ | (15,263) | | | $ | 591,906 | | | $ | 89 | | | $ | 591,995 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended |
| Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total Stockholders’ Equity | | Noncontrolling Interest | | Total Equity |
| Shares | | Stock | | | | | | |
| | | | | | | | | | | | | | | |
Balance at January 1, 2022 | 25,300,793 | | | $ | 120,615 | | | $ | 583,134 | | | $ | 16,093 | | | $ | (15,025) | | | $ | 704,817 | | | $ | 89 | | | $ | 704,906 | |
Comprehensive loss: | | | | | | | | | | | | | | | |
Net income | | | | | 49,315 | | | | | | | 49,315 | | | | | 49,315 | |
Other comprehensive income (loss), net of tax | | | | | | | (174,627) | | | | | (174,627) | | | | | (174,627) | |
Cash dividends declared and paid, $0.80 per share | | | | | (20,423) | | | | | | | (20,423) | | | | | (20,423) | |
Treasury shares purchased under deferred directors' plan | (3,574) | | | 285 | | | | | | | (285) | | | 0 | | | | | 0 | |
Treasury shares sold and distributed under deferred directors' plan | 8,555 | | | (221) | | | | | | | 221 | | | 0 | | | | | 0 | |
Stock activity under equity compensation plans | 39,388 | | | (1,728) | | | | | | | | | (1,728) | | | | | (1,728) | |
Stock based compensation expense | | | 4,620 | | | | | | | | | 4,620 | | | | | 4,620 | |
Balance at June 30, 2022 | 25,345,162 | | | $ | 123,571 | | | $ | 612,026 | | | $ | (158,534) | | | $ | (15,089) | | | $ | 561,974 | | | $ | 89 | | | $ | 562,063 | |
| | | | | | | | | | | | | | | |
Balance at January 1, 2023 | 25,349,225 | | | $ | 127,004 | | | $ | 646,100 | | | $ | (188,923) | | | $ | (15,383) | | | $ | 568,798 | | | $ | 89 | | | $ | 568,887 | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | | | | | 38,889 | | | | | | | 38,889 | | | | | 38,889 | |
Other comprehensive income (loss), net of tax | | | | | | | 11,278 | | | | | 11,278 | | | | | 11,278 | |
Cash dividends declared and paid, $0.92 per share | | | | | (23,542) | | | | | | | (23,542) | | | | | (23,542) | |
Treasury shares purchased under deferred directors' plan | (4,501) | | | 285 | | | | | | | (285) | | | 0 | | | | | 0 | |
Treasury shares sold and distributed under deferred directors' plan | 12,855 | | | (405) | | | | | | | 405 | | | 0 | | | | | 0 | |
Stock activity under equity compensation plans | 71,637 | | | (3,124) | | | | | | | | | (3,124) | | | | | (3,124) | |
Stock based compensation expense | | | (393) | | | | | | | | | (393) | | | | | (393) | |
Balance at June 30, 2023 | 25,429,216 | | | $ | 123,367 | | | $ | 661,447 | | | $ | (177,645) | | | $ | (15,263) | | | $ | 591,906 | | | $ | 89 | | | $ | 591,995 | |
| | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)
| | | | | | | | | | | | | | |
Six Months Ended June 30, | | 2023 | | 2022 |
Cash flows from operating activities: | | | | |
Net income | | $ | 38,889 | | | $ | 49,315 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | |
Depreciation | | 3,069 | | | 3,020 | |
Provision for credit losses | | 5,150 | | | 417 | |
| | | | |
Amortization of loan servicing rights | | 286 | | | 385 | |
Net change in loan servicing rights valuation allowance | | 0 | | | (701) | |
Loans originated for sale, including participations | | (4,266) | | | (23,082) | |
Net gain on sales of loans | | (127) | | | (777) | |
Proceeds from sale of loans, including participations | | 3,421 | | | 28,430 | |
Net (gain) loss on sales of premises and equipment | | (1) | | | 1 | |
Net gain on sales and calls of securities available-for-sale | | (19) | | | 0 | |
Net securities amortization | | 2,369 | | | 3,245 | |
Stock based compensation expense | | (393) | | | 4,620 | |
Losses (earnings) on life insurance | | (1,384) | | | 266 | |
| | | | |
Tax benefit of stock award issuances | | (720) | | | (500) | |
Net change: | | | | |
Interest receivable and other assets | | (1,411) | | | 165 | |
Interest payable and other liabilities | | (7,958) | | | 26,355 | |
Total adjustments | | (1,984) | | | 41,844 | |
Net cash from operating activities | | 36,905 | | | 91,159 | |
| | | | |
Cash flows from investing activities: | | | | |
Proceeds from sale of securities available-for-sale | | 99,951 | | | 0 | |
Proceeds from maturities, calls and principal paydowns of securities available-for-sale | | 38,886 | | | 59,617 | |
Proceeds from maturities, calls and principal paydowns of securities held-to-maturity | | 6 | | | 5 | |
Purchases of securities available-for-sale | | (4,314) | | | (313,905) | |
Purchase of life insurance | | (191) | | | (657) | |
Net (increase) decrease in total loans | | (157,846) | | | (137,525) | |
Proceeds from sales of land, premises and equipment | | 13 | | | 1 | |
Purchases of land, premises and equipment | | (3,823) | | | (2,314) | |
Purchase of Federal Home Loan Bank stock | | (5,625) | | | 0 | |
Proceeds from redemption of Federal Home Loan Bank stock | | 0 | | | 932 | |
| | | | |
| | | | |
Net cash from investing activities | | (32,943) | | | (393,846) | |
| | | | |
Cash flows from financing activities: | | | | |
Net increase (decrease) in total deposits | | (37,561) | | | (113,823) | |
Net increase (decrease) in short-term borrowings | | (22,000) | | | 0 | |
Payments on long-term FHLB borrowings | | 0 | | | (75,000) | |
Proceeds from short-term FHLB borrowings | | 125,000 | | | 0 | |
| | | | |
Common dividends paid | | (23,529) | | | (20,410) | |
Preferred dividends paid | | (13) | | | (13) | |
Payments related to equity incentive plans | | (3,124) | | | (1,728) | |
Purchase of treasury stock | | (285) | | | (285) | |
Sale of treasury stock | | 405 | | | 221 | |
Net cash from financing activities | | 38,893 | | | (211,038) | |
Net change in cash and cash equivalents | | 42,855 | | | (513,725) | |
Cash and cash equivalents at beginning of the period | | 130,282 | | | 683,240 | |
Cash and cash equivalents at end of the period | | 173,137 | | | 169,515 | |
Cash paid during the period for: | | | | |
Interest | | $ | 57,011 | | | $ | 8,768 | |
Income taxes | | 7,125 | | | 7,065 | |
Supplemental non-cash disclosures: | | | | |
Loans transferred to other real estate owned | | 284 | | | 0 | |
| | | | |
Right-of-use assets obtained in exchange for lease liabilities | | 0 | | | 1,612 | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1. BASIS OF PRESENTATION
This report is filed for Lakeland Financial Corporation (the "Company"), which has two wholly owned subsidiaries, Lake City Bank (the "Bank") and LCB Risk Management, a captive insurance company. Also included in this report are results for the Bank’s wholly owned subsidiary, LCB Investments II, Inc. ("LCB Investments"), which manages the Bank’s investment securities portfolio. LCB Investments owns LCB Funding, Inc. ("LCB Funding"), a real estate investment trust. All significant inter-company balances and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, 2023. The Company’s 2022 Annual Report on Form 10-K should be read in conjunction with these statements.
Adoption of New Accounting Standards
On March 31, 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures." The update amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and and class of financing receivable by year of origination. The update is available for entities that have adopted the amendments in update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company elected to early adopt the provisions of the ASU related to the discontinuance of TDR reporting, with retrospective application of modification reporting effective starting January 1, 2022. The Company adopted the provisions related to reporting of current-period gross write-offs within the vintage disclosures effective January 1, 2023. The adoption of the provisions contained within ASU 2022-02 did not have a material impact on the consolidated financial statements.
On March 28, 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method." ASC 815 previously permitted only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendment in this update allows nonrepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope allows an entity to apply the same portfolio hedging method to both prepayable and nonprepayable financial assets, thereby allowing consistent accounting for similar hedges. The update became effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company adopted ASU 2022-01 on January 1, 2023, which did not have a material impact on the consolidated financial statements.
Newly Issued But Not Yet Effective Accounting Standards
On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Company has formed a cross-functional project team to lead the transition from LIBOR to a planned adoption of reference rates which could include Secured Overnight Financing Rate ("SOFR"), amongst others. The Company has identified certain loans that renewed prior to 2021 and obtained updated reference rate language at the time of the renewal. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. The Company's policy is to adhere to the International Swaps and Derivatives Association 2020 IBOR Fallbacks Protocol that was released on October 23, 2020.
The Company discontinued the use of new LIBOR-based loans by December 31, 2021, according to regulatory guidelines. The Company transitioned LIBOR-based loans to an alternative reference rate before June 30, 2023. On December 22, 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (ASC 848): Deferral of the Sunset Date of Topic 848", which definitively provided a sunset date of December 31, 2024 for the relief guidance allowed under Topic 848. The ASU was effective immediately upon issuance. The Company adopted the LIBOR transition relief allowed under this standard, and does not expect final adoption to have a material impact on the consolidated financial statements.
On March 28, 2023, the FASB issued ASU 2023-02, "Investments-Equity Method and Joint Ventures (ASC 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." ASU 2014-01, "Investments-Equity Method and Joint Ventures (ASC 323): Accounting for Investments in Qualified Affordable Housing Projects", previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of net income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items.
The amendments in this update permit reporting entities to elect to account for certain tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax benefits in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, all of the following conditions must be met: (1) It is probable that the income tax credits allocated to the tax equity investor will be available; (2) The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project; (3) Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits included income tax credits, other income tax benefits, and other non-income tax -related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project; (4) The tax equity investor's projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive; and (5) The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor's liability is limited to its capital investment. An accounting policy election is allowed to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The amendments in this update require specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method. The amendments require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understanding the following information about its investments that generate income tax credits and other income tax benefits from a tax credit program including: (1) The nature of its tax equity investments; and (2) The effect of its tax equity investments and related income tax credits and other income tax benefits on its financial position and results of operations.
For public business entities, the amendments in this update are effective for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, the provisions shall be adopted as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company is currently evaluating the impact of this standard for its LIHTC investments and the impact to noninterest income and income tax expense within the consolidated financial statements.
Reclassification
Certain amounts appearing in the consolidated financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders' equity as previously reported.
NOTE 2. SECURITIES
Debt securities purchased with the intent and ability to hold to their maturity are classified as held-to-maturity securities. All other investment securities are classified as available-for-sale securities.
Available-for-Sale Securities
Information related to the amortized cost, fair value and allowance for credit losses of securities available-for-sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the table below.
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(dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
June 30, 2023 | | | | | | | | | | |
U.S. Treasury securities | | $ | 3,251 | | | $ | 0 | | | $ | (19) | | | $ | 0 | | | $ | 3,232 | |
U.S. government sponsored agencies | | 151,029 | | | 0 | | | (28,943) | | | 0 | | | 122,086 | |
Mortgage-backed securities: residential | | 545,616 | | | 34 | | | (83,617) | | | 0 | | | 462,033 | |
| | | | | | | | | | |
State and municipal securities | | 564,165 | | | 10 | | | (89,457) | | | 0 | | | 474,718 | |
Total | | $ | 1,264,061 | | | $ | 44 | | | $ | (202,036) | | | $ | 0 | | | $ | 1,062,069 | |
| | | | | | | | | | |
December 31, 2022 | | | | | | | | | | |
U.S. Treasury securities | | $ | 3,057 | | | $ | 0 | | | $ | (23) | | | $ | 0 | | | $ | 3,034 | |
U.S. government sponsored agencies | | 156,184 | | | 0 | | | (29,223) | | | 0 | | | 126,961 | |
Mortgage-backed securities: residential | | 578,175 | | | 67 | | | (85,934) | | | 0 | | | 492,308 | |
| | | | | | | | | | |
State and municipal securities | | 663,367 | | | 157 | | | (100,299) | | | 0 | | | 563,225 | |
Total | | $ | 1,400,783 | | | $ | 224 | | | $ | (215,479) | | | $ | 0 | | | $ | 1,185,528 | |
Held-to-Maturity Securities
Information related to the amortized cost, fair value and allowance for credit losses of securities held-to-maturity and the related gross unrealized gains and losses is presented in the table below.
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(dollars in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
June 30, 2023 | | | | | | | | | | |
State and municipal securities | | $ | 129,070 | | | $ | 0 | | | $ | (14,806) | | | $ | 0 | | | $ | 114,264 | |
| | | | | | | | | | |
December 31, 2022 | | | | | | | | | | |
State and municipal securities | | $ | 128,242 | | | $ | 0 | | | $ | (17,213) | | | $ | 0 | | | $ | 111,029 | |
| | | | | | | | | | |
On April 1, 2022, the Company elected to transfer securities from available-for-sale to held-to-maturity as an overall balance sheet management strategy. The fair value of securities transferred was $127.0 million from available-for-sale to held-to-maturity. The unrealized loss on the securities transferred from available-for-sale to held-to-maturity was $24.4 million ($19.3 million, net of tax) based on the fair value of the securities on the transfer date and was $21.9 million ($17.3 million, net of tax) at June 30, 2023. The Company has the current intent and ability to hold the transferred securities until maturity. Any net unrealized gain or loss on the transferred securities included in accumulated other comprehensive income (loss) at the time of the transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. There have been no subsequent transfers of securities from available-for-sale to held-to-maturity.
Information regarding the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by maturity as of June 30, 2023 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.
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| | Available-for-Sale | | Held-to-Maturity |
(dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 4,331 | | | $ | 4,312 | | | $ | 0 | | | $ | 0 | |
Due after one year through five years | | 8,799 | | | 8,052 | | | 0 | | | 0 | |
Due after five years through ten years | | 30,996 | | | 29,763 | | | 0 | | | 0 | |
Due after ten years | | 674,319 | | | 557,909 | | | 129,070 | | | 114,264 | |
| | 718,445 | | | 600,036 | | | 129,070 | | | 114,264 | |
Mortgage-backed securities | | 545,616 | | | 462,033 | | | |